McDonald's (NYSE:MCD) is one of the greatest success stories in American business, growing from a single burger stand in 1940 to over 35,000 locations worldwide today. For better or worse, it is as bright a symbol as any other of American capitalism and culture around the world.
Now, the company finds itself in trouble both at home and abroad as shifting consumer tastes, brand fatigue, and food safety concerns have sunk sales.The company in April noted it would be closing 700 restaurants around the world this year. Even more surprising, The Associated Press reports that 2015 will be the first time that the company's U.S. store count will have shrunk in a single year since at least 1970, which is when McDonald's started putting a U.S. store count in its annual report filed with the SEC.
This is not the first time the company has faced challenges. In the early 2000s, the stock price tumbled as the company's image was tarnished by negative media attention like the books Fast Food Nation and the documentary Supersize Me, but a turnaround plan led by then-new CEO Jim Skinner helped revive the brand by focusing on its core offerings.
Even then, though, sales never had a full-year decline and its domestic store count didn't fall, which underscores the urgency of the company's situation today. Other fast-food chains, such as Starbucks in 2008, have gone through such store closures and restructuring and come out healthier, but McDonald's is in a different predicament than the coffee giant was then. The key question for investors is whether this is just a temporary setback or the beginning of McDonald's long demise.
McDonald's in April said it would be closing roughly 350 underperforming restaurants, primarily in Japan, the U.S. and China, in addition to 350 previously announced closings across the globe. Considering that the company has over 35,000 stores globally, that figure represents only 2% of its total, so the impact on overall performance would likely be minimal, especially considering that as McDonald's closes some underperforming stores each year, that is offset by new store openings.
In its April conference call, management did not say how many locations in the U.S are slated for closure, but the AP reports that McDonald's plans to close more restaurants in the U.S. this year than it opens, but quoted a McDonald's spokeswoman as saying the reduction would be "minimal" compared to the U.S. total of about 14,300.
Everyone can't be a winner
McDonald's insists that there is still room for expansion within the U.S., but its downsizing is also notable as it comes at a time when the overall restaurant industry is thriving. Industrywide, same-store sales in the U.S. were up 4% in the first quarter, up from just 0.8% a year earlier, outpacing overall retail sales and the economy as a whole by a wide margin. McDonald's comparable sales, meanwhile fell 2.6% in the U.S. in the same period. Clearly, consumers are spending some of the extra discretionary income from a lower unemployment rate and gas prices at restaurants. Had the overall industry been weaker, McDonald's results probably would have been even poorer.
Meanwhile, as the Golden Arches falters, rivals like Chipotle Mexican Grill are dominating. The burrito roller saw comparable sales grow 17% last year and 10% in the first quarter. And it's not just the fast-casual chains that are soaring past McDonald's. Even its closer restaurant relatives like Burger King and Wendy's are outperforming. At the burger chain Sonic, comparable sales in its most recent quarter jumped 11.5%. Wendy's expects same-store sales to tick 2.5% to 3% higher this year, and that figure was up 4.6% at Burger King in its first quarter.
That's a sign that despite new CEO Steve Easterbrook's aim for McDonald's to be a "modern, progressive burger company," the chain isn't just losing customers to comparably upscale Chipotle. While millennials may love the burrito chain's customizable choices, the real reason McDonald's is suffering is because it's losing its core patrons to rivals like Sonic, Wendy's, and Burger King. And its plan to reinvent itself by increased customization and higher quality food may not be the right recipe to gain those customers back.
To do that, McDonald's needs to get back to basics -- offering tasty food at low prices served quickly. The competition knows that, but McDonald's investors are still waiting for management to figure it out.